Geithner Declares Victory as TARP Nears First Anniversary

Ahead of the Troubled Asset Relief Program's first anniversary, Treasury Department officials on Thursday started a campaign to declare victory over the financial crisis, arguing that government intervention in the financial sector had saved the economy.

At a hearing before the Tarp Congressional Oversight Panel, Treasury Secretary Timothy Geithner said a raft of programs begun since the government bailout effort was introduced in October have stabilized the financial system and that winding down those programs will start soon. "Today I believe, because of comprehensive policy actions put in place since then, we are back from the edge of the abyss," Geithner said.

Though most of the programs will begin winding down, an administration effort to increase loan modifications and a separate program to promote small-business lending are to be continued.

The Treasury said it would let its guarantee program for money market mutual funds expire on Sept. 18 and has also largely sidelined its efforts to buy toxic securities.

Geithner's comments came a day after the Federal Deposit Insurance Corp. said it would let a program to guarantee bank debt expire on Oct. 31, though it is considering keeping an emergency debt plan in place for an additional six months.

Though many Treasury programs were never called on — the Treasury never made a payout, for example, through its money market mutual fund program — Geithner and other Treasury officials said their very existence helped stabilize markets.

A Treasury document also touted the fact that the government's net exposure under Tarp is now little more than half of the original $700 billion.

In fact, far from needing more money — the Obama administration had said early this year it might ask Congress for an additional $250 billion — the Treasury said the government would continue to recoup its costs. Banks have repaid more than $70 billion invested through Tarp's capital purchase program, and the Treasury expects another $50 billion to be repaid within 18 months.

One plan that never got off the ground despite repeated attempts was a program to buy illiquid mortgage loans and securities. Though the original point of Tarp was to have the government buy troubled assets, a Treasury official speaking to reporters on background said the latest version of that effort — the Public-Private Investment Program — does not appear to be needed.

Though he said the plan was still being worked on, the official said the administration initially started the program to help banks attract private capital. But private capital has started coming to banks even without a bad-asset program.

PPIP was divided into two parts. The FDIC proposed to offer auctions of wholesale mortgage loans, helping to guarantee financing for investors. But this plan was significantly scaled back and is now a pilot program designed to sell assets from failed banks, not from open and operating institutions.

The Treasury had been expected to handle similar auctions of troubled securities, but it is unclear if that will plan will ever get off the ground.

During his testimony before the oversight panel, Geithner said that, as banks attracted capital, the need to sell troubled assets became less urgent. "The problems posed by those assets are dramatically addressed by that capital," he said.

But Elizabeth Warren, the panel's chairman, said later in the day that troubled assets remain a problem at smaller banks. "The risk is there," she told CNBC. "It's the risk in these smaller banks. No one has a really good sense of how big it is, so we've got this unknown risk out there … . It's not clear to me it's been resolved."

Geithner walked a tightrope in presenting an optimistic outlook and asserting the success of his programs without claiming a complete recovery.

"I would not want anyone to be left with the impression that we are not still facing really enormous challenges in the financial system," he said. "The classic errors of economic policy during crises are to act late with insufficient force and then put the brakes on too early. We are not going to repeat those mistakes."

Some observers, however, said Geithner may be declaring victory too early. It appeared the Treasury was eager to get ahead of an expected flood of stories looking back at the enactment of Tarp, they said.

"One has to be somewhat careful to take credit for all the good signs and not pay enough attention to all the bad signs … . Things are not perfect," said James Barth, a finance professor at Auburn University and a senior fellow at the Milken Institute. "There are mixed signs. I think there obviously are signs the economy is going to grow at a positive rate, but I think it's premature to think all the problems are behind."

He also said one of the most massive government interventions in the market — the seizure of Fannie Mae and Freddie Mac — does not appear to be anywhere near its end. The Treasury official deflected questions on the future of the government-sponsored enterprises, saying it was an issue for next year.

"There's not a gush of private-sector capital flowing into the private housing markets," Barth said. "They are still dominated by Fannie Mae, Freddie Mac and Ginnie Mae. Postponing to next year means there is still a big issue to deal with."

Members of the oversight panel were also hesitant to cheer the Treasury's success. "Almost one year later I continue to be concerned and curious what Tarp has evolved to today. … It's a mixed report card at best," said Rep. Jeb Hensarling, R-Tex.